Guest Post: A Follow-up to the EU Commission’s Decision to ‘Split’ Trade and Investment Protection

In a previous post Simon Lester has commented on President Juncker’s wish to rescue the EU’s trade policy, by concluding a set of streamlined trade agreements with Australia and New Zealand that would carve out contentious clauses on investment protection. In a previous blogpost from June 2017 I have suggested a split between EU trade and investment agreements. In light of this, I will provide some further comments on the EU Commission’s potential policy shift, which is most likely a response to recent EU law developments.

The EU’s Current Approach is Not Really Working

By now it is common knowledge that while the EU is a ‘veteran’ at concluding PTAs, its experience with investment protection is a lot more recent, following the changes brought by the Lisbon Treaty to the EU’s Common Commercial Policy. Following these amendments, the EU has embarked on an ambitious plan to negotiate far-reaching FTAs with Canada, Vietnam, Singapore, the USA, and Japan, which include/will include standards of investment protection and a new form of ISDS (‘Investment Court System – ICS’).

Combining trade and investment under one roof is not an EU invention; in a recent co‑authored paper that covered 158 post-NAFTA PTAs, Maxim Usynin and I came to the conclusion that the inclusion of investment chapters into PTAs is widespread in US, Canadian, Japanese, Australian, MERCOSUR and ASEAN PTAs, as well as rising in the PTAs of India, Chile or China. Choosing such an ‘all-in’ approach is not in itself problematic, provided that the fields covered by these agreements are not contentious internationally or domestically.

In case of the multi-level EU, the Commission’s mission to satisfy the various domestic and international interests has proven to be a daunting task. On the international level contracting parties such as Canada and Singapore are clearly frustrated. The 2014 version of CETA had to be revised in 2016 in order to include the EU’s new ICS, while the EU-Singapore FTA was on hold because of CJEU Opinion 2/15 and it now faces a renegotiation so as to include the ICS. Moreover, a Japanese official has recently declared that they would favour a classical type of ISDS mechanism in their FTIA with the EU, instead of the ICS. Domestically things do not look brighter. Civil society and NGOs have been protesting against including ISDS in EU FTIAs, followed by groups of academics and regional parliaments.

The Game Changers

In recent months two important events occurred that are most likely behind the Commission’s push to split trade and investment agreements. Putting the aforementioned difficulties aside, first, the CJEU delivered its binding Opinion 2/15, which clarifies EU and Member State competences over FTIAs. Second, Belgium has officially requested an Opinion from the CJEU on whether the ICS included in CETA is compatible with EU law.

2.1 The EU can now conclude a far-reaching trade agreement without the Member States

As the Annex to this post illustrates, in Opinion 2/15 the CJEU created a clear split between the various areas the EUSFTA that cover trade and those relating to investment. All the traditional trade related areas, such as market access for goods, trade remedies, various barriers to trade, customs and tariffs, fall under exclusive EU competences. Furthermore, services – including all five means of transport services -, public procurement, intellectual property, sustainable development, and competition are now also covered by the EU’s exclusive external competences, as well as those parts of the EUSFTA’s chapters on dispute settlement between the parties and transparency that do not relate to areas of shared competence. If we take away the aforementioned exclusive EU policy fields what we are left with is investment protection and ISDS, parts of which still fall under shared competences.

It follows that after Opinion 2/15 the EU can conclude a far-reaching trade agreement, without investment protection, by itself. This means that the presence of the Member States during the conclusion of such agreements is not required (no ‘mixity’), and national/regional parliaments will not be involved in the ratification process. Moreover, the Commission now has a solid legal argument against the political choice of its Member States to participate in the conclusion and ratification of such trade agreements.

2.2 The future of the ICS is in jeopardy

As mentioned, on the insistence of Wallonia, the Belgian federal government has requested an Opinion from the CJEU on whether the ICS model included in CETA is compatible with EU law. Not only will the rendering of this Opinion further stall the ratification of CETA, but as I have argued in a previous article, the CJEU will most likely find the ICS to be incompatible with the autonomy of EU law and the CJEU’s exclusive jurisdiction to give binding interpretations of EU law. In such a case the incompatible provisions would have to be removed from the international agreement in order for it to enter into force. This would most likely mean the end of bilateral Investor-State Courts.

Benefits of Removing Investment Chapters from FTAs

First, with the removal of the contentious ISDS item from the agenda, the new trade agreements could be negotiated more swiftly. Member State or regional parliaments would not block the ratification of such agreements and civil society would not cause further upheaval. It is worth mentioning that in the case of CETA, Vietnam and EU-Singapore the inclusion of investment chapters has delayed negotiations by several years, has caused domestic discontent and tarnished the EU’s international image

Second, such a trade agreement would only be concluded by the EU, which would considerably simplify its ratification and it would lower the chances of a prolonged provisional application of the agreement. This would create more legal certainty, since provisional application often does not include the whole agreement and it might create further complications in case of potential disputes brought under the agreement’s dispute settlement provisions.

Third, separate bilateral investment agreements could be concluded later, in the form of mixed agreements or even a potential multilateral agreement on an Investment Court.

Possible Drawbacks

There could also be a risk that the second bilateral investment agreement, or more likely a multilateral agreement, would not materialize. This could result in a gap in the protection of EU investments abroad. Nonetheless, it must be mentioned that in the case of the FTIA partners such as Singapore, Canada, Vietnam or the USA 46 Member State BITs are already in place. Furthermore, under Regulation 1219/2012 Member States continue concluding new, post-Lisbon BITs. 43 such agreements exist thus far, 18 of which have entered into force with many more awaiting approval.

Given the current deadlock in the conclusion of FTIAs, the removal of investment protection would at least ensure that the trade components of these agreements would not be jeopardized and a trade agreement could be concluded.

Annex – Competences over the EUSFTA after Opinion 2/15

No

Chapter

Advocate General

CJEU

1

Objectives and General Definitions

Exclusive EU

Shared *

2

National Treatment and Market Access for Goods

Exclusive EU

Exclusive EU

3

Trade Remedies

Exclusive EU

Exclusive EU

4

Technical Barriers to Trade

Exclusive EU

Exclusive EU

5

Sanitary and Phytosanitary Measures

Exclusive EU

Exclusive EU

6

Customs and Trade Facilitation

Exclusive EU

Exclusive EU

7

Non-Tariff Barriers to Trade and Investment in Renewable Energy Generation

Exclusive EU

Exclusive EU

8

Services, Establishment and Electronic Commerce

Exclusive EU except

Exclusive EU

air, maritime, inland water ways transport (shared)

9

Investment

Exclusive over FDI / ISDS except

Exclusive EU except

non-direct investment and ISDS related to it (shared)

Non-direct investment and ISDS (shared)

Termination of MS BIT excl. MS

Termination of MS BIT excl. EU

10

Government Procurement

Exclusive EU except

Exclusive EU

Procur. for trans. services (shared)

11

Intellectual Property

Exclusive except

Exclusive EU

non-commercial aspects of IP rights (shared)

12

Competition and Related Matters

Exclusive EU

Exclusive EU

13

Trade and Sustainable Development

Some components shared while others exclusive

Exclusive EU

14

Transparency

Shared *

Shared *

15

Dispute Settlement Between the Parties

Shared *

Shared *

16

Mediation Mechanism

Shared *

Shared *

17

Institutional, General and Final Prov.

Shared *

Shared *

* shared in so far as they relate to Chapter 9 on Investment to the extent that they fall under shared competence

Comments

In a previous post Simon Lester has commented on President Juncker’s wish to rescue the EU’s trade policy, by concluding a set of streamlined trade agreements with Australia and New Zealand that would carve out contentious clauses on investment protection. In a previous blogpost from June 2017 I have suggested a split between EU trade and investment agreements. In light of this, I will provide some further comments on the EU Commission’s potential policy shift, which is most likely a response to recent EU law developments.

The EU’s Current Approach is Not Really Working

By now it is common knowledge that while the EU is a ‘veteran’ at concluding PTAs, its experience with investment protection is a lot more recent, following the changes brought by the Lisbon Treaty to the EU’s Common Commercial Policy. Following these amendments, the EU has embarked on an ambitious plan to negotiate far-reaching FTAs with Canada, Vietnam, Singapore, the USA, and Japan, which include/will include standards of investment protection and a new form of ISDS (‘Investment Court System – ICS’).

Combining trade and investment under one roof is not an EU invention; in a recent co‑authored paper that covered 158 post-NAFTA PTAs, Maxim Usynin and I came to the conclusion that the inclusion of investment chapters into PTAs is widespread in US, Canadian, Japanese, Australian, MERCOSUR and ASEAN PTAs, as well as rising in the PTAs of India, Chile or China. Choosing such an ‘all-in’ approach is not in itself problematic, provided that the fields covered by these agreements are not contentious internationally or domestically.

In case of the multi-level EU, the Commission’s mission to satisfy the various domestic and international interests has proven to be a daunting task. On the international level contracting parties such as Canada and Singapore are clearly frustrated. The 2014 version of CETA had to be revised in 2016 in order to include the EU’s new ICS, while the EU-Singapore FTA was on hold because of CJEU Opinion 2/15 and it now faces a renegotiation so as to include the ICS. Moreover, a Japanese official has recently declared that they would favour a classical type of ISDS mechanism in their FTIA with the EU, instead of the ICS. Domestically things do not look brighter. Civil society and NGOs have been protesting against including ISDS in EU FTIAs, followed by groups of academics and regional parliaments.

The Game Changers

In recent months two important events occurred that are most likely behind the Commission’s push to split trade and investment agreements. Putting the aforementioned difficulties aside, first, the CJEU delivered its binding Opinion 2/15, which clarifies EU and Member State competences over FTIAs. Second, Belgium has officially requested an Opinion from the CJEU on whether the ICS included in CETA is compatible with EU law.

2.1 The EU can now conclude a far-reaching trade agreement without the Member States

As the Annex to this post illustrates, in Opinion 2/15 the CJEU created a clear split between the various areas the EUSFTA that cover trade and those relating to investment. All the traditional trade related areas, such as market access for goods, trade remedies, various barriers to trade, customs and tariffs, fall under exclusive EU competences. Furthermore, services – including all five means of transport services -, public procurement, intellectual property, sustainable development, and competition are now also covered by the EU’s exclusive external competences, as well as those parts of the EUSFTA’s chapters on dispute settlement between the parties and transparency that do not relate to areas of shared competence. If we take away the aforementioned exclusive EU policy fields what we are left with is investment protection and ISDS, parts of which still fall under shared competences.

It follows that after Opinion 2/15 the EU can conclude a far-reaching trade agreement, without investment protection, by itself. This means that the presence of the Member States during the conclusion of such agreements is not required (no ‘mixity’), and national/regional parliaments will not be involved in the ratification process. Moreover, the Commission now has a solid legal argument against the political choice of its Member States to participate in the conclusion and ratification of such trade agreements.

2.2 The future of the ICS is in jeopardy

As mentioned, on the insistence of Wallonia, the Belgian federal government has requested an Opinion from the CJEU on whether the ICS model included in CETA is compatible with EU law. Not only will the rendering of this Opinion further stall the ratification of CETA, but as I have argued in a previous article, the CJEU will most likely find the ICS to be incompatible with the autonomy of EU law and the CJEU’s exclusive jurisdiction to give binding interpretations of EU law. In such a case the incompatible provisions would have to be removed from the international agreement in order for it to enter into force. This would most likely mean the end of bilateral Investor-State Courts.

Benefits of Removing Investment Chapters from FTAs

First, with the removal of the contentious ISDS item from the agenda, the new trade agreements could be negotiated more swiftly. Member State or regional parliaments would not block the ratification of such agreements and civil society would not cause further upheaval. It is worth mentioning that in the case of CETA, Vietnam and EU-Singapore the inclusion of investment chapters has delayed negotiations by several years, has caused domestic discontent and tarnished the EU’s international image

Second, such a trade agreement would only be concluded by the EU, which would considerably simplify its ratification and it would lower the chances of a prolonged provisional application of the agreement. This would create more legal certainty, since provisional application often does not include the whole agreement and it might create further complications in case of potential disputes brought under the agreement’s dispute settlement provisions.

Third, separate bilateral investment agreements could be concluded later, in the form of mixed agreements or even a potential multilateral agreement on an Investment Court.

Possible Drawbacks

There could also be a risk that the second bilateral investment agreement, or more likely a multilateral agreement, would not materialize. This could result in a gap in the protection of EU investments abroad. Nonetheless, it must be mentioned that in the case of the FTIA partners such as Singapore, Canada, Vietnam or the USA 46 Member State BITs are already in place. Furthermore, under Regulation 1219/2012 Member States continue concluding new, post-Lisbon BITs. 43 such agreements exist thus far, 18 of which have entered into force with many more awaiting approval.

Given the current deadlock in the conclusion of FTIAs, the removal of investment protection would at least ensure that the trade components of these agreements would not be jeopardized and a trade agreement could be concluded.

Annex – Competences over the EUSFTA after Opinion 2/15

No

Chapter

Advocate General

CJEU

1

Objectives and General Definitions

Exclusive EU

Shared *

2

National Treatment and Market Access for Goods

Exclusive EU

Exclusive EU

3

Trade Remedies

Exclusive EU

Exclusive EU

4

Technical Barriers to Trade

Exclusive EU

Exclusive EU

5

Sanitary and Phytosanitary Measures

Exclusive EU

Exclusive EU

6

Customs and Trade Facilitation

Exclusive EU

Exclusive EU

7

Non-Tariff Barriers to Trade and Investment in Renewable Energy Generation

Exclusive EU

Exclusive EU

8

Services, Establishment and Electronic Commerce

Exclusive EU except

Exclusive EU

air, maritime, inland water ways transport (shared)

9

Investment

Exclusive over FDI / ISDS except

Exclusive EU except

non-direct investment and ISDS related to it (shared)

Non-direct investment and ISDS (shared)

Termination of MS BIT excl. MS

Termination of MS BIT excl. EU

10

Government Procurement

Exclusive EU except

Exclusive EU

Procur. for trans. services (shared)

11

Intellectual Property

Exclusive except

Exclusive EU

non-commercial aspects of IP rights (shared)

12

Competition and Related Matters

Exclusive EU

Exclusive EU

13

Trade and Sustainable Development

Some components shared while others exclusive

Exclusive EU

14

Transparency

Shared *

Shared *

15

Dispute Settlement Between the Parties

Shared *

Shared *

16

Mediation Mechanism

Shared *

Shared *

17

Institutional, General and Final Prov.

Shared *

Shared *

* shared in so far as they relate to Chapter 9 on Investment to the extent that they fall under shared competence